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Throughout the age of globalisation, a phenomenon characterised by a complex web of international supply chains, businesses have frequently been criticised for failing to ensure ethical standards within these networks. While they may endeavour to adhere to their ESG (Environmental, Social, and Governance) responsibilities internally, an increasing number of companies are being held accountable for the actions of their suppliers. This shift mirrors a growing expectation among consumers, regulators, and investors that businesses should adopt a holistic, end-to-end approach to ESG compliance.
Nike’s high-profile controversy involving forced labour from the Uyghur population in China is perhaps the most prominent recent example. In 2020, the Australian Strategic Policy Institute reported that Uyghurs were compelled into the supply chains of 83 global brands in technology, clothing and automotive sectors. This led to significant reputational damage for Nike, and they were forced to address the issue. This incident underlined the fact that it is not sufficient for businesses to focus solely on their immediate operations – they must also ensure that suppliers share their commitment to ESG principles.
The fashion industry, in particular, is no stranger to such controversies. In 2013, the Rana Plaza tragedy in Bangladesh killed more than 1,100 garment workers, drawing global attention to the supply chains of several high-street brands such as Primark and Benetton. These brands faced intense scrutiny, not just because they sourced products from the Rana Plaza factory, but also due to their perceived lack of due diligence in assessing their supplier’s ESG standards.
Further, Nestlé encountered their own ESG scandal in 2005 when they were implicated in abusive labour practices in the cocoa farms of West Africa. A documentary titled ‘The Dark Side of Chocolate’ brought to light the child labour and slavery rampant in the supply chains. As a result, Nestlé and other chocolate companies faced significant consumer backlash, leading to the development of their Action Plan to combat child labour.
Turning to the technology sector, the extraction of minerals such as tantalum, tin, tungsten, and gold – collectively known as 3TG – has been linked to significant human rights abuses in the Democratic Republic of Congo (DRC). High-tech giants like Apple have been implicated due to the presence of these ‘conflict minerals’ in their supply chains. Notably, these companies faced public and regulatory pressures, including the Dodd-Frank Act in the U.S., compelling them to identify and address such issues in their supply chains.
Moreover, the palm oil industry has come under fire for environmental negligence. In 2018, Greenpeace accused 25 major brands, including Nestlé and Unilever, of sourcing palm oil from suppliers linked to deforestation. This led to reputational risk and investor concerns, forcing these companies to reevaluate their supply chains and reassert their commitment to their ESG goals.
What these examples highlight is a growing recognition that businesses bear a responsibility to ensure ESG compliance throughout their supply chains. However, these controversies also underline a common problem: the failure to conduct comprehensive supply chain audits based on ESG principles.
An effective ESG supply chain audit would have pre-empted many of the aforementioned incidents by identifying the risks beforehand. Traditional audits have focused primarily on financial metrics, occasionally complemented by social or environmental assessments. But the emerging need is for holistic ESG audits, which combine all three elements to provide a comprehensive understanding of a business’s entire value chain.
An ESG audit would first evaluate a supplier’s environmental impact, scrutinising areas such as waste management, energy use, and impact on biodiversity. This might have helped identify the deforestation issues linked to the palm oil suppliers. Second, social audits could investigate labour practices, working conditions, and human rights compliance, which might have brought to light the forced labour and child exploitation in the cases of Nike and Nestlé. Lastly, governance audits could assess the management and corporate behaviour of suppliers, highlighting any potential ethical or regulatory violations.
The challenge is to implement such audits effectively, integrating them into business practices. This involves training auditors to understand and evaluate ESG risks, establishing clear ESG standards for suppliers, and introducing penalties for non-compliance. Businesses must also be prepared to act on audit findings, even if this means severing ties with suppliers.
By embracing ESG audits, businesses can proactively address potential risks, safeguard their reputations, and uphold their ethical commitments. As the aforementioned examples demonstrate, the consequences of ignoring ESG compliance in supply chains can be disastrous for businesses. Therefore, an ESG-centric approach to supply chain management is not just an ethical imperative, but a strategic necessity.